Liu He might have made a deal in DC last week, but Xi Jinping is his boss. His boss is not happy with the fact Congress just slapped his country in the face with the passing of the Hong Kong Human Rights and Democracy Act. Beijing is officially furious. Do not doubt Xi snubs phase I of Trump’s mini-trade deal.
The House of Representatives approved the Hong Kong legislation on Tuesday, moving it a significant step closer to becoming law. A similar bill is in the Senate.
There is bipartisan support on this issue, making it much like the Russian sanctions bills that Trump was forced to sign. He may be in a similar boat with Hong Kong, especially if the bill comes to his desk before the APEC Summit in Chile on November 17 where he is supposed to meet with Xi and settle up on this phase I agreement made with his Vice Premier.
China’s A-shares, as tracked by the CSI-300 Index, fell half a percent on the news on Wednesday.
The prospect of a U.S.-China truce will always be a short-lived boost to markets. Investment firms are pretty much unanimous in their belief that the trade war is here to stay, tariffs and all.
Deep fundamental differences remain between the U.S. and China on how an economy should be. And that means a decoupling from China will continue on multiple fronts as all of this unfolds, be it American tech companies being banned from selling to Chinese firms, or pressure on corporations and investors regarding the roll they are playing in supporting America’s biggest political and economic rival.
Markets may be more volatile in the days ahead, or fall if Xi is slow to green light some $50 billion in U.S. farm commodity purchases as stated in last week’s meetings.
What started off as tariffs used to exact concessions from China has now moved to other areas. To date, China has given up nothing in the trade war though officials there have stated that they would no longer retaliate in kind with tit-for-tat tariff increases.
“The addition of human rights to the growing list of areas of U.S.-China confrontation reduces the possibility of a comprehensive settlement,” TS Lombard managing director Jon Harrison wrote in a note to clients on Monday, days before Congress passed the Hong Kong Human Rights Act. “The prospect of a partial deal does not change our view of the intractable nature and complexity of differences elsewhere.”
Another congressional matter could tick off China, too. Seeing how the NBA just got a total pop culture beat down, even managing to get Alexandria Ocasio Cortez to agree with the likes of Ted Cruz on the China matter, it goes without saying that official Washington is in no mood to placate Beijing. Trump may be Beijing’s only friend, in a very odd yet true sense.
Senators Marco Rubio and Jeanne Shaheen want the government’s Thrift Pension System to stick to its old benchmark for pensions held by military retirees rather than go to the MSCI All Country World Index next year. That index holds China securities, including companies that have been sanctioned at one time by Washington or are on the entity list.
Others in the market like hedge fund star Kyle Bass are constantly advocating for tougher due diligence on new Chinese small cap listings, and questioning why certain Chinese ADRs are not subject to the same audit process as American firms.
Sanctions against publicly traded Chinese companies would take a sledge hammer to China sentiment, a market that up to now has weathered Trump’s trade war better than anyone imagined.
Sanctions would mean that companies around the world must stop their business dealings with sanctioned companies if they are conducting business with them in dollars.
One of the Phase I requirements was for lifting sanctions on China Overseas Shipping Company, better known as COSCO. Increasing sanctions on China would have a chilling effect on China’s economy and signal ill will towards Beijing.
Trump is walking on egg shells on this issue. He does not want to upset the market, and wants to give China a chance to reverse course and become more of a market economy.
For years, China has disrupted global manufacturing and greatly subdued the pricing powers of everything from steel to solar panels due to gross oversupply and a complete disregard for market principals. That would not be a problem if China was a closed system. But China products circumvent the globe. If China is swimming in steel, it depresses steel prices. If China warehouses are full to the rooftop with solar panels, what American company is going to want to make them when buyers can get them for much cheaper out of China?
Some have used the trade war to attack Trump politically, touting their free trade bonafides. They are mostly against tariffs, all the while forgetting that China is not a free trade economy.
A former Obama campaign staffer and consultant for the Democratic Party, Brendan Flanagan, wrote in an op-ed published on Real Clear Politics on Tuesday that his home state of Ohio paid over $1 billion in tariffs since the trade war began.
“You can thank the president for that,” he noted.
Ohio’s farmers and small businesses have faced $599 million in retaliatory tariffs from China, making it harder for them to sell their goods to China, he says. “When it’s more expensive to import goods and harder to sell products abroad, companies usually start laying off workers. Trade supports 1.4 million jobs across Ohio, and President Trump’s trade war is threatening an estimated 76,500 of those jobs,” he wrote.
The problem with his argument is that no one is stopping China from buying soybeans, except for Xi himself. The U.S. has not stopped buying Chinese widgets because they cost 25% more at the port. But China has basically sanctioned the purchase of key farm commodities, and soybeans are getting crushed, pun intended.
More importantly, the U.S. unemployment rate is at an all time low of 3.4%. So who is laying off? Agricultural exports last year rose 1%, so this is not a market being killed by the Chinese, data shows.
But for sure China’s main man, Xi Jinping, could kill this mini-trade deal quickly.
Shanghai and Shenzhen finished lower at -0.41% and -0.38%, respectively, after opening higher in the morning only to close down on the day. Washington’s latest Hong Kong move probably weighed on market sentiment.
China’s markets have become far more inward-looking as a result of the trade war, so that is keeping China fans in buy mode. China’s investors are looking to their government for sentiment signals, rather than paying attention to Washington.
Wall Street is doing they same.
Investors in China here in the U.S. will be paying close attention to the Chinese government over the next four weeks until the APEC Summit. If Xi signals he is not going ahead with Phase I, Trump will raise tariffs. If China investors are lucky, that is all the Executive Branch does.